This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

PCAOB adopts changes to the auditor’s report and proposes new requirements related to auditing accounting estimates and the use of specialists

  • PCAOB document (green) Image

Jun 01, 2017

The PCAOB has (1) approved a new auditing standard on the auditor’s reporting model as well as related conforming amendments to its standards (subject to final approval by the SEC) and (2) proposed changes to its performance standards related to auditing accounting estimates and use of the work of specialists.

New standard on the auditor’s reporting model (subject to SEC approval)

The new auditor reporting standard will significantly modify the auditor’s reporting model. While the new standard will retain the current “pass/fail” approach, it will also significantly increase the information included in auditors’ reports.

In a statement announcing the standard, PCAOB Chairman James Doty stated the following:

[The new standard] will make the auditor’s report more relevant, useful and informative to investors and other financial statement users. . . . In today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors in our public capital markets want a better understanding of the judgments that go into an auditor’s opinion — not a recitation of the standard procedures that apply to any audit, but the specific judgments that were most critical to the auditor in arriving at the opinion.

The key changes to the auditor’s report under the standard are:

  • A new required section describing critical audit matters (CAMs) arising from the audit of the current period’s financial statements. In this new section, the auditor will identify the CAMs, describe the principal considerations that led to the particular CAMs, describe how the auditor addressed the CAMs in the audit, and refer to the related financial statement accounts and disclosures. In addition:
    • CAMs are defined as “any matter that was communicated or required to be communicated to the audit committee and that:
      • Relates to accounts or disclosures that are material to the financial statements, and
      • Involved especially challenging, subjective, or complex auditor judgment.”
    • The standard includes a nonexclusive list of factors for the auditor to take into account when determining whether a matter involved especially challenging, subjective, or complex auditor judgment.
    • The determination of a CAM should be made in the context of a particular audit with the aim of providing audit-specific information rather than a discussion of generic risks.
  • The standardization of the order and form of the auditor’s report, with the opinion section appearing first and section titles included to guide the reader.
  • The addition of a new statement indicating that the auditor is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.
  • Enhanced descriptions of the auditor’s roles and responsibilities in the audit.
  • Inclusion of the year the auditor began serving consecutively as the company’s auditor.

Communication of CAMs is not required for audits of emerging growth companies, broker/dealers, investment companies other than business development companies, or benefit plans, but the standard permits voluntary inclusion of CAMs in the auditor’s report for such entities. Note that all other provisions of the standard apply to the audits of these types of companies.

The effective date will be phased in as follows:

  • Communication of CAMs will be effective:
    • For fiscal years ending on or after June 30, 2019, for auditor reports issued in connection with the audits of large accelerated filers (as defined by the SEC).
    • For fiscal years ending on or after December 15, 2020, for auditor reports issued for all other audits to which the requirements apply.
  • Remaining changes to the auditor’s report, including auditor tenure, will apply to auditor reports issued for fiscal years ending on or after December 15, 2017.

The PCAOB will submit the new auditor reporting standard and related amendments to the SEC for its approval. The SEC’s approval process typically includes an additional public comment period. Auditors may elect to comply with the standard before its effective date at any point after the SEC approves it.

Note that the new auditor reporting standard is not significantly different from the requirements and guidance previously proposed by the PCAOB in May 2016.

Proposed new requirements related to auditing accounting estimates and the use of specialists

The PCAOB’s proposals on auditing accounting estimates, including fair value measurements, and the use of the work of specialists are intended to strengthen and enhance the existing standards and to address the difference between the auditor’s use of a company’s specialists and those employed or engaged by the auditors. The proposed changes are intended to:

  • Establish a single standard for, and build on the existing approaches to, auditing estimates (testing the company’s process, developing an independent expectation, and evaluating evidence from the subsequent transactions and events) by expanding the guidance for auditors.
  • Better align the auditing of accounting estimates with the PCAOB’s risk assessment standards.
  • Update the standards to address the use of pricing services by both management and auditors.
  • Establish a uniform risk-based approach to testing and evaluating the work of a company’s specialists and amend the standards on audit evidence.
  • Establish a common supervisory approach for auditor specialists, whether employed or engaged by the auditors, specifically ensuring appropriate oversight and supervision in both situations.

Comments on the proposals are due to the PCAOB by August 30, 2017.

Next steps

Watch for Deloitte’s forthcoming Heads Up and Audit & Assurance Update newsletters for additional analysis of the PCAOB’s auditor reporting standard and proposals related to auditing accounting estimates and use of specialists.

For information about the PCAOB’s proposed changes to the auditor’s model, see Deloitte’s May 27, 2016, Audit & Assurance Update. For a summary of the June 18, 2015, meeting of the PCAOB’s Standing Advisory Committee, at which auditing accounting estimates and the use of specialists were discussed, see Deloitte’s July 1, 2015, Heads Up.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.